ANALYSIS-Spills flame Canadian oil debate, but won't curb flows to US

* Canadian oil makes up 29 pct of U.S. imports

* Keystone XL decision looms for Obama

* Output on track to jump more than 50 pct in 7 years

By Jeffrey Jones

CALGARY, Alberta, April 2 Two high-profile oil
spills won't stem the now-record flow of Canadian oil into the
United States, despite the frenzy that the spills triggered
among friends and foes of the Keystone XL pipeline to the main
U.S. refineries.

The fate of Keystone remains undecided, yet Canadian crude
will become an increasing part of the U.S. energy mix, despite
growing competition from new U.S. production.

U.S. thirst for Canadian crude has shot up nearly 30 percent
over the past five years as refiners opt to buy from the north
instead of bringing in more expensive OPEC oil, thanks to a boom
in production from the vast Alberta oil sands.

Midwest refiners have invested billions of dollars to tweak
plants to take more of the heavy crude from the region, and a
small but growing network of rail routes have sprouted up to
augment existing pipelines.

So even as environmentalists seized on oil spills last week
in Arkansas and Minnesota to warn about the impact of expansion
in the tar sands -- the world's third-largest crude deposit --
it appears only a crash in the price of oil or unexpected
regulation will derail the growing energy interdependence.

"Short-term, this is not good for producers, it's not good
for Canadian oil going south, it's not good for Keystone," John
Stephenson, vice-president and portfolio manager at First Asset
Investment Management in Toronto said of the two spills.

"But I think the reality is this oil is going to make it
south of the border, quite likely by rail or one of the other
pipelines across the Canadian-U.S. border, so I see it as a
short-term hiccup at worst."

Canada's black gold has allowed the Obama administration to
crow about dwindling reliance on oil from less-friendly
suppliers in the Middle East and elsewhere. In addition, a glut
of the Canadian heavy oil has tempered higher gasoline prices,
especially in the U.S. Midwest.

That may trump increasingly bad PR for Canada's oil, much of
which is produced by energy- and carbon-intensive methods such
as mining or steaming, making it a prime target in the battle
over policies to fight global warming.

Yet the growing role of Canadian crude in the U.S. economy
cannot be denied. Overall U.S. oil imports fell to 8.5 million
barrels a day last year from over 10 million in 2007, but
supplies from Canada jumped to 2.4 million barrels a day, from
just under 1.9 million, over the period, according to the U.S.
Energy Information Administration.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

That puts Canadian crude at nearly 29 percent of foreign
supplies in the United States, despite the remarkable increase
in U.S. domestic light oil output from regions such as the North
Dakota Bakken that has fueled predictions of North American
energy self-sufficiency in 15 years.

In fact, the two types of crude compete little for refinery
space, as Canada's heavy crude is being directed at U.S. Gulf
Coast plants that are configured to process heavy oil, which now
arrives in dwindling volumes from Venezuela and Mexico.

"If that's the case, then Obama's left with not an energy
choice -- he's left with a geopolitical choice," said Michal
Moore, director of energy and environmental policy at the
University of Calgary's School of Public Policy and a former
California energy regulator.

"Do you want to piss off Canada by not letting oil into the
refineries that can handle it most easily? I don't know how he
makes that judgment but I will say that this doesn't help."

Other refiners have also invested to process more feedstock
from Canada, with BP sinking $4 billion into its Whiting,
Indiana plant to take more of the heavy, sour oil.

In addition to heavy tar sands oil, Canada also exports
large volumes of conventional lighter crude.

In January, the U.S. imported over 1.5 million bpd of heavy
Canadian crude, defined by the Canadian Association of Petroleum
Producers as having an API Gravity of less than 27 degrees, and
nearly 1.15 million bpd of lighter, easier to refine oil,
according to the EIA.

PIPELINE, RAIL ACCIDENTS

Last week's spills both involved oil from Canada.

On Friday, Exxon Mobil Corp's aging Pegasus pipeline
ruptured in Arkansas, forcing a cleanup of thousands of barrels
of heavy Canadian oil that leaked into a suburban neighborhood.

The incident followed an oil spill in rural Minnesota on
Wednesday after a Canadian Pacific Ltd train derailed.
The tanker-car leaked several hundred barrels of Alberta crude
and reignited concern about oil moving by train as pipeline
capacity lags production growth.

Producers shipped about 45,000 barrels of Canadian oil into
the United States by train last year, up from almost nothing
just five years earlier, based on Reuters calculations of data
from Canada's National Energy Board. Current shipments could be
as much as 150,000 barrels a day, estimated Steven Paget,
analyst at FirstEnergy Capital Corp.

The spills are the latest in a string of problems for
shippers of Canadian crude that have inflamed the debate over
the oil sands. The largest spill was the Enbridge Inc
line break in Michigan in 2010, which sent more than 20,000
barrels of Canadian oil into the Kalamazoo River system.

U.S. regulators last month ordered Enbridge's U.S. affiliate
to do more cleanup at the site, pushing the bill to near $1
billion.

TransCanada Corp, backer of the long-delayed $5.3
billion Keystone XL pipeline to Texas refineries from Alberta,
and the line's supporters, say oil spills highlight the need for
safer energy infrastructure rather than a shift from pipelines.

"I don't think it will have an impact (on Canadian exports
and the approval of pipelines). Look, it's being seized on by
those who oppose hydrocarbon development, but if you follow
their logic to its conclusion, what they're saying, I guess, is
they don't want to see any pipelines built," Canadian Natural
Resources Minister Joe Oliver said of the Arkansas spill.

"It's not because of Canadian crude that there was a spill.
It was an old pipeline, more than 60 years old."

Oliver has led Ottawa's intense lobbying campaign in favor
of the 830,000 barrel a day Keystone XL project, which will take
Canadian crude to Gulf refineries. Washington is set to decide
on the line this summer and it could be in service in 2015.

PRODUCTION PREDICTION

All predictions are for a steady climb in Canadian
production, explaining the industry and government's quest for
new markets in the United States and non-traditional areas such
as Asia, one of the biggest drivers engines of world oil demand
growth.

Canada's National Energy Board has predicted output will
average 3.6 million barrels a day this year, up 12.5 percent
from 2012, putting it nearly 400,000 barrels a day ahead of No.
2 OPEC producer Iraq's current output.

The industry sees a jump in output to 4.7 million barrels a
day by the end of the decade, with new pipelines such as
Enbridge's contentious Northern Gateway to Canada's Pacific
Coast and TransCanada's Energy East line to the Atlantic
provinces planned to move much of the increase.

Last week, Wood Mackenzie, the energy research firm,
predicted output of bitumen from the oil sands, will increase by
540,000 barrels a day over the next two years.

Almost three-quarters of that will come from projects that
have already been approved and have a break-even oil price below
$60 a barrel, WoodMac said. The current price for Canadian heavy
oil is about $80 a barrel.
(Additional reporting by Scott Haggett in Calgary and Patrick
Rucker in Washington; Editing by Janet Guttsman, Matthew
Robinson and Leslie Gevirtz)

Next In Oil report

TORONTO, Dec 9 Canada's main stock index
extended a 19-month high on Friday and was heading for a 1.8
percent jump over the week as heavyweight energy and bank stocks
gained with rising oil prices and bond yields.

LONDON, Dec 9 Angola does not need to devalue
its currency at the moment but will work on measures to lessen
the gap between the formal and informal exchange rates, central
bank governor Valter Filipe da Silva told Reuters.

Trending Stories

Sponsored Topics

Reuters is the news and media division of Thomson Reuters. Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Learn more about Thomson Reuters products: